In an August 14, 2012 opinion in the FDIC’s lawsuit against former directors and officers of the failed Haven Trust bank, Northern District of Georgia Judge Steve C. Jones affirmed that Georgia’s business judgment rule is applicable to the actions of bank directors and officers. Based on that determination, Judge Jones dismissed the FDIC’s claims against the directors and officers for ordinary negligence and breach of fiduciary duty. Judge Jones also ruled that the FDIC must replead its gross negligence claims against the former directors and officers to provide specific allegations as to each defendant’s alleged involvement in or responsibility for the alleged wrongdoing.

A copy of the August 14 opinion can be found here. An August 15, 2012 memo from the Alston & Bird law firm describing the August 14 ruling can be found here.

Haven Trust Bank of Duluth, Georgia was one of the first banks to fail as part of the current bank failure wave. Regulators closed the bank on December 18, 2008. As described in greater detail here, on July 14, 2001, the FDIC as receiver for the bank filed a lawsuit against 15 of the bank’s former directors and officers. The FDIC’s complaint specifically alleges improper lending practices and seeks to recover over $40 million. Among other things, the FDIC alleges that the bank suffered losses of over $7 million on improper loans to family members of two bank insiders. In its complaint, the FDIC asserts claims for negligence, breach of fiduciary duty, and gross negligence.

The defendants moved to dismiss, arguing that Georgia’s business judgment rule protects bank directors and officers from personal liability for ordinary negligence and from liability for breach of fiduciary duty in the absence of allegations of bad faith, fraud or abuse of discretion. The defendants also contended that the FDIC had not pled a valid claim for gross negligence.

In his August 14, 2012 opinion, Judge Jones granted the defendants’ motions to dismiss the FDIC”s claims for negligence of for breach of fiduciary duty. He determined first that, contrary to the arguments of the FDIC, t was appropriate to consider the business judgment rule at the motion to dismiss stage. Judge Jones then went on to conclude that “when Georgia’s business judgment rule is applied to claims for ordinary negligence, Georgia courts hold that such claims are not viable.” He also specifically confirmed that the business judgment rule is applicable in the banking context. Based on these determinations, Judge Jones dismissed the FDIC’s claims for ordinary negligence and breach of fiduciary duty (based on ordinary negligence).

Judge Jones denied the defendants’ motion to dismiss the gross negligence count, finding that “the complaint has alleged in a collective/group manner sufficient facts for which a jury might reasonably conclude that Defendants were ‘grossly negligent’ as defined by Georgia law.” However, noting that the “factual allegations must give each defendant ‘fair notice’ of the nature of the claim” against them, Judge Jones ordered the FDIC to replead its gross negligence claim “to provide specific allegations as to each Defendant’s involvement or responsibility for the alleged wrongs, decisions, approvals, transactions and loans referenced in the original Complaint.”

Judge Jones’s rulings in the Haven Trust Bank case are consistent with his earlier rulings in the FDIC’s action against certain former directors and officers of Integrity Bank, another failed Georgia banking institution. As discussed here, in February 2012, Judge Jones ruled in the Integrity Bank case that Georgia’s business judgment rule protects the directors and officers of banks from claims for ordinary negligence and for breach of fiduciary duty based on negligence. In a footnote in this August 14 opinion in the Haven Trust case, Judge Jones expressly stated that he “adheres to and incorporates by reference into [the August 14 opinion], the Court’s prior holdings (in the context of a motion to dismiss, motion for judgment on the pleadings and motion for reconsideration) on the business judgment rule” in the Integrity Bank case.

Coincidentally, and also on August 14, 2012, Judge Jones entered a 52-page opinion in the Integrity Bank case denying the FDIC’s motion for reconsideration of the prior ruling in that case on the applicability of the business judgment rule and certifying the entire order for interlocutory appeal. A copy of the August 14 opinion denying the FDIC’s motion for reconsideration in the Integrity Bank case can be found here.

These rulings in the Georgia cases are significant for a number of reasons. First and foremost, more banks have failed in Georgia during the current wave of bank failure than in any other state. The determination of the issues regarding director and officer liability under Georgia law potentially could affect the FDIC’s potential claims against the directors and officers of many other failed Georgia banks. In addition, because Georgia banks were heavily represented among the earliest failures during the bank failure wave, the FDIC’s claims against Georgia banks have moved further along than claims the FDIC later filed elsewhere.

The determinations in the cases that have advanced further inevitably will have an effect on the cases that were filed later – and indeed, may have an impact on whether or not the FDIC’s even files a complaint in connection with banks that failed later. Certainly, if the FDIC cannot pursue claims for ordinary negligence in Georgia (and perhaps elsewhere), that could cause the FDIC to forebear from filing suit in at least some situations. For that reason, it will be important to see whether the Eleventh Circuit elects to take up the interlocutory appeal in the Integrity Bank case. A opinion from the Eleventh Circuit would obviously not only prove determinative in existing and potential future failed bank suits in Georgia, but could prove influential in suits and potential suits elsewhere in the Eleventh Circuit, and perhaps even outside the Circuit.

Along those lines, and in terms of what is happening on these issues elsewhere, earlier this month a judge in the Middle District of Florida, ruled in the FDIC’s failed bank lawsuit relating to the failed Florida Community Bank of Immokalee, Florida, that under Florida law directors cannot be held liable for ordinary negligence, as discussed in a prior post, here. The ruling in that case did not reach the question of whether or not officers can be held liable for ordinary negligence under Florida law.

Very special thanks to a loyal reader for providing me with a copy of the two August 14 orders in the Haven Trust and Integrity Bank cases.

More About Libor Scandal-Related Litigation: In an earlier post (here), I took a closer look at the Libor scandal, including in particularly the litigation that has arisen in the wake of the scandal. Since I added that post, there have been other lawsuits filed (refer here and here). It is clear that the Libor scandal litigation will be an important part of the litigation landscape for months and years to come.

An August 4, 2012 Economist article entitled “Suing the Banks: Blood in the Water” (here) takes its own look at the Libor-scandal litigation. The article notes that many law firms are looking at the Libor scandal as a potentially lucrative source of business. The article states that “so far, at least 28 serious lawsuits have been filed.” All of these cases, the article notes, are “either assigned or likely to be assigned” to Southern District of New York Judge Naomi Buchwald.

The Economist article notes that “if there is a hesitation” it is because, notwithstanding Barclays’s massive regulatory settlements “a case will not be easy to make.” Establishing culpability “will not be straightforward.” Among other things, “no one is forced to use [Libor], and those who do often add further costs (such as a credit spread).” In addition, “it will not be easy to determine what the rate should have been” since that will require determining “what the rate should have been each trading day, minus any potential benefit.” Working this out will be “mind-wrenchingly complex for many.”

Just the same, as the article notes in conclusion, other legal action tied to Libor is “percolating” in Japan, Canada and Singapore, and “it would not be a shock if there were not more cases in America as well.”

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